Vickers gives banks 8 years to put house in order

Monday 12 September 2011 07:04 BST

Britain's major banks were today given eight years to achieve the biggest shake-up in the industry's history.

The Government-backed Independent Commission on Banking said that they should ring-fence their retail activities to protect them from the activities of their riskier, "casino" investment bank divisions.

It also called for them to hold much more spare capital than international regulators have recommended to ensure that the taxpayer is never again called on to bail out banks.

But the deadline for the reforms has been set for the start of 2019 - much later than Chancellor George Osborne had suggested. This puts them in line with Basel III which is when the next round of international banking regulation is due to come into force.

Commission chairman Sir John Vickers said: "We do have a fragile economic recovery at the moment and I think a time-scale like that puts to rest any fears about how these reforms might interfere with the process of economic recovery.

"In fact, on the contrary, we believe these ring-fenced retail banks will provide a much more stable, secure basis for supply of credit to households and firms in the UK economy."

The Commission stopped short of calling for the separation of retail and investment banking. It said ring-fencing would be less costly but still effective because it would isolate those parts of banks "where continuous provision of service is vital to the economy".

In addition, the Commission has called for banks to raise their equity capital to at least 10% of their assets, which is higher than the 7% set by Basel III.

On top of this banks should have "loss-absorbing" capital of 17%-20% of their risk-weighted assets. Vickers' report estimated the costs of reforms at £4-£7 billion a year which is to be borne by shareholders, employees and to a lesser extent customers.

Analysts said Barclays and Royal Bank of Scotland faced the biggest bills for the reforms at well over £1 billion each.

The Commission said it now did not believe Lloyds should be forced to sell any more than the 632 branches it has been ordered to divest by the European Union. But it called on the Government to "ensure the divestiture leads to the emergence of a strong challenger bank". This would mean cutting the funding gap at the business which is being sold to make it more attractive to buyers. It debated referring the banking industry to the Competition Commission but decided not to.

However, it said a referral should be made if some of its recommendations, including easier account switching and a strong competitor emerging from the Lloyds sale, were not achieved by 2015.

Changes greeted by relief and a grudging acceptance

Today's radical plans for the shake-up of the banking industry were widely welcomed by consumer groups, greeted with relief by investors and grudgingly accepted by bankers.

Richard Hunter, head of UK equities Hargreaves Lansdown Stockbrokers:"The separation of retail and investment banking had long been trailed, although the implementation date of 2019 gives banks more room for manoeuvre."

Peter Vicary-Smith, chief executive Which?:"Consumers can't afford to bail out the banks again and they don't trust bankers, so Which? agrees with the Commission's call for strong action."

Neil Bentley, CBI deputy director-general:"The Government must rigorously examine how and when to implement these proposals, otherwise it risks damaging businesses and threatening growth. Some of the services that might be prohibited within the ring-fence could increase costs for firms.

Angela Knight, chief executive of the British Bankers' Association:"It is vital the impact reforms will have on the economy, the recovery and banks' ability to support their customers in the UK is understood."

Nicola Kay, lawyer at Ashurst:"The banks won't breathe a sigh of relief, the only reason they would have done that is if there had been a U-turn. The saving grace is the long lead-in period."

Paul Mumford, fund manager, Cavendish Asset Mangement:"It will be a relief for investors to have the thing on the table because at least they now know what the worst-case scenario is."

Tony Anderson, banking partner, Pinsent Mason: "The ongoing reaction of the markets to these proposals, whether other jurisdictions follow suit and whether they ultimately position London as a financial safe haven are the big questions. The Government would be wise to delay any reforms until the economy is better able to digest them."